Find out why Nilesh Shah bets on luck, gut & timing

Nilesh Shah, the managing director at Kotak Mahindra AMC shared his experience in managing some of his popular funds with CNBC-TV18's Anuj Singhal. He said that Bosch has done extremely well, and managed to retain competitive advantage and technological edge. Shah believes that Bosch has a premium versus its peers and will continue to perform well on the bourses.  Who can forget the infamous case of Satyam Computer Services.Shah was underweight on Satyam, initially. "Maytas' acquisition by Satyam could not take place, and the stock saw a massive correction. Ramalinga Raju came on TV and said that he had no cash on the balance sheet to buy Maytas. And that's when I decided to sell all Satyam shares. That day the stock price fell from Rs 180 to Rs 10," said Shah. Shah regrets not investing in Gujarat Fluorochem as he could not meet the management. "I should have done my homework," he added.  Below is the verbatim transcript of Nilesh Shah’s interview to Anuj Singhal on CNBC-TV18..Q: Let us talk about some of your big investments. I was reading that this whole story on Bosch that at Rs 100 face value it was available at Rs 1,500. You bought a large quantity of that for your fund and we had Nimesh Shah of Enam also buying a quantity of that. 10 or 15 years from that point we have now a Rs 10 face value stock going up to Rs 20,000 and an index stock. Fascinating story, take us through that and also the fact that we keep hearing Nimesh Shah's name for Bosch, but not your name?A: One, I bought it in fund, not in my personal name. Second, the way we identified this stock was essentially based on the fact that whenever we went to meet Tata Motors they would always say I am dependent upon Bosch in terms of what components they supply. Those were the days of early 90s, mid 90s where if a component maker could control the original guy, original equipment maker you know the power. At that point of time there was a big Foreign Institutional Investors (FII) who was a seller of the stock and that stock and that is why the stock had corrected to about Rs 1,750 from Rs 2,500. There were very few people who were willing to bet against that FII. We did our homework and thought that this is great stock to buy and we picked up that stock and then later on we realised we were not the only one to pick up that stock, there was another gentleman also who we could rely upon who bought that stock and then the rest is history. That stock has done fantastically well and in stock picking all you need is to back up your guts with calculations with data, with analytics and the job is done.Q: So, do you think the equity scarcity premium or whatever it is for companies like Bosch that is always going to remain - these stocks are always going to remain expensive as they are right now?A: No, I can't say that with surety. Like human life, you become young, then grow old. Surely in valuation also maturity will come. But as long as a company like Bosch retains their competitive advantage they retain that technological moat which others can't jump over they will definitely retain their premium. It is all about companies running hard to remain in the place they are. Certainly Bosch today gives that confidence that they will retain their technological edge.Q: You have made money in stocks which have destroyed value. Satyam is a case in point, DeccanChronicle is the other case in point. Tell us the story about how did you manage to make money in these stocks and what does that tell you about the psyche in stock market or timing in the stock markets?A: In Satyam's case in my fund we had always remained underweight on this stock and this was primarily driven by the fact that all the technology companies were investor in my mutual fund but Satyam never invested any money. They were never investor in liquid fund, never investor in income fund, never in guild fund and that was kind of strange. We always wonder what is this company doing with the cash. So, we have always under invested in Satyam vis-à-vis benchmark.There was a time when Satyam suddenly announced that they are merging Mitas Infra into that company that resulted into a correction in the stock and at that point of time we thought, oh the correction has happened, stock is becoming cheap. Even if we ignore other income probably it is worth buying. So, we bought Satyam. Now, as the luck would have it Mr Raju came on television, on CNBC channel, I vividly remember and he made a confession that there is no cash in the balance sheet. As the luck would have it I was standing right next to my dealer and I said dump all our Satyam. I didn't wait to speak to my fund managers, I simply said whatever is our saleable quantity just give the order to sell and we were lucky enough to sell and make profit over our acquisition cost. On that day I remember Satyam fell from Rs 180 to Rs 10 and we could exit at a reasonably high level and still make profit in Satyam. So, there my guess is that it was more of luck.Q: More than luck would you say that, for example, if you get a conviction that something is wrong then sell, no matter what the price is, you would have sold even if you were at minor losses or say, 20 percent mark to market losses?A: I didn't put any price limit on my order. We just decided to sell. So, maybe the quantity was a little less, it wasn't very huge, maybe we were lucky but obviously you have to give quick reaction when news comes. On the other hand Deccan was a case where we were initial public offering (IPO) investor, we did our research on the company. We saw the company moving from Hyderabad market to Chennai market to Bangalore market. The stock actually delivered about 6-7 times return to us. We had almost near 10 percent stake in the company.There was one great research analyst called Prabhat Awasthi from Nomura, one day he came with a research report saying that the advertising revenue shown by this company in Hyderabad is more than the total advertising revenue of Hyderabad including Telugu and English newspaper. This is not true. How can this be. But then he persisted with his data, he arranged our meeting with one of the media buyer, we did our homework and we realised that yes, this is true. Then we looked at the balance sheet of the company, the company's cash was going up and so was the debt. And then we took a call that it is time to book profit. We started getting out of that shares.On some other hand some marquee buyers were buying that stock. Some big FII, some very respected mutual fund, obviously it put doubt in our mind, are we the only guys who is doing this kind of work. Then we did one more thing, we collected Deccan Chronicle newspaper over ten days, measured every single advertisement which the sold had sold and then divided that by the revenue to arrive at what is the price per centimetre. That price was higher than Times of India in Mumbai. We sold all our shares.Q: Gujarat Fluorochemicals Limited is one of your regrets that you did not invest despite having conviction in that?A: I joined in my job at ICICI Prudential and I put a condition that we will not invest in any stock till such time that we have met the management. We had launched a value fund over their discovery and based on quantitative analytics we had figured out that Gujarat Fluoro is the stock to buy, but we couldn't meet the management, we tried on our own, we tried via broker, and then I said, look we will follow the investment process, we will not go by our gut, we will not invest till such time we met the management. That cost me a ten bagger stock. Maybe I should have got the flexibility to invest in companies even when managements are not willing to meet you, if you have done your homework properly. That was a lesson. You need to have a process, you need to have a discipline but every rule needs to have an exception. Making money is paramount, following process is just an incidental things. I can't be rigid in my process, I have to be flexible to make money.Q: Which are the factors that makes India attractive?A: Market is factoring in two things which has changed in India. One is the path of fiscal prudence. We are the only country which is reducing fiscal deficit whereas everyone else is going up. Second we are the only country which is having such a high nominal or real interest rate. Everyone else is on the negative side. So, in a world where there is enough money going at negative interest rates at the last count it was more than USD 10 trillion. They are looking for investment opportunity and India provides that oasis in the desert. It is no longer one eyed man in the land of blinds. It is oasis in the desert. Where will you find growth, where will you find ability to cut interest rates from 7.35 or 7.37 percent all the way down and the path of fiscal prudence the macro India which has given so much of flexibility is giving confidence to investors.Q: You are talking about good macro but what has done remarkably well is the micro. The midcap and small caps, they are just flying. Any reasons to get worried here with the quality of the rally or do you think it is fine?A: There is some amount of flow coming into small and midcaps and hence there could be pockets of overvaluation but it is probably going to get healed by time corrections rather than price correction. Most of the midcap companies we are meeting today they are still having capacity, they are still generating free cash flow, they are declaring dividends and the promoter governance is at par with the large cap companies. So, my guess is that baring some amount of time corrections if you are in quality midcaps you still have room to go.Q: Quality midcaps, any theme that stands out for you?A: For us domestic economy is something which is working out well. There is about 1 crore central government employees who will get Rs 70,000-80,000 per head annually. There will be another 1.5 crore state government and public sector enterprise employees who will receive that next year. So, this Rs 70,000-80,000 individually will be spent and wherever they will be spent in those areas small, mid, large will give great value. The first amount will be on upgrading your automobiles. In 2010 when the sixth pay commission gave money to them they would have gone ahead and brought 100 CC bike, they would have gone and bought entry level car, now they are probably going to upgrade it. So, two wheeler, four wheelers will do well.Most likely it is possible that they will move from one room kitchen to one bedroom hall kitchen, so the affordable housing segment and more importantly items which will go into building affordable houses like cement, pipes, fittings, electrical appliances those things will do well. Banks which will give housing loans to this people again should do well. So, these are all the segments which are linked to domestic economy, linked to the spending power of government employees. They should be able to maintain growth give volume expansion as well as margin expansion.Q: Domestic fund flow situation is really intact and that has been a most heartening aspect of all through the correction that domestic funds remain intact tells you that retail remained intact. Do you think that flow is only going to increase now having seen the worst of market correction maybe?A: Undoubtedly, we are seeing huge amount of maturity at the retail investor level. Even in places like Bhubaneshwar, Lucknow, Jaipur, Rajkot there is a set of people who are now committed stock market investor through Systematic Investment Plan (SIP). Partly, it is their experience, partly it is their neighbours experience and partly it is regulators ground work in establishing credibility. Partly, it is fund managers job but I think a large portion of credit should go to the advisors who have gone and educated them and ensured that they are holding on to this.  If I see the domestic flow, mutual funds this year should be able to do anywhere between Rs 65,000-75,000 crore in stock market. Insurance companies should give between Rs 35,000-50,000 crore, provident should give between Rs 5,000-10,000 crore. Retail and High net worth individual (HNI) put together and PSU and private sector banks they will bring another Rs 25,000-30,000 crore. You have almost Rs 1,57,000 crore plus demand from mutual fund, insurance companies, retail, HNI, provident funds and banks. The supply is only from government on divestment that is about Rs 30,000-50,000 crore and IPOs and qualified institutional placement (QIP) which is another Rs 40,000-50,000 crore. So, you still have from the potential supply a short fall of Rs 50,000-60,000 crore. On top of it if the foreign institutional investors (FIIs) are net buyers you will have more demand and less supply which should again support the prices.For entire show, watch accompanying videos...